I received an email from one of my good friends moments after Ivanhoe Mines [IVN:TSE] released news that a rights offering was made to all shareholders. The company announced a US$1.8 billion rights offer allowing shareholders to subscribe to new shares at C$8.34, a discount of 26 per cent from the previous day's price. As would be the case, my friend had many questions and wanted to know if he should exercise his rights. I told him that a financial theory suggests an investor exercising their rights will not profit or lose. Here's why.
Ivanhoe Mines issued a rights offer at $8.34 to raise funds for a mining project. Prior to the news, the stock closed at around C$11.50 on the Toronto Stock Exchange. It seems like a great arbitrage deal for an investor, therefore, a profit must occur, but that is not true. Let us examine the reason with a very basic example.
If Mr. Jones bought 100 shares of Company ABC at $20 and exercises his rights, thus purchasing another 100 at $16, he would have spent $2000 + $1600 on 200 shares, bringing his average cost base down to $18/share. The market would also push the shares down to $18 as well because of market efficiency. Nobody would be willing to overpay for the stock if it is fairly valued at $18.
Now, Company ABC is trading at $20 with 1,000,000 shares outstanding; that means ABC is worth $20 million. The company issues a rights offer at 1:1 with a subscription price of $16 per share. If all share holders exercised their rights, the company would now have 2,000,000 shares and its new market capitalization would be the sum of the old market capitalization ($20 m) and the new cash received ($16m), which equates to $36 million. But that $36 million is divided evenly amongst 2 million shares, creating a share price of $18.
Assuming no change in company valuation, Mr. Jones would see his shares slowly fall to $18 creating no loss or gain following the completion of the issue.
So, with that basic lesson done, how do we understand Ivanhoe's second rights offer in under two years? The first important thing is determining the amount of rights an investor will receive. Although we are uncertain, it appears that an investor will receive about 20 to 22 rights for every board lot owned, determined by dividing $1.8 billion into the value of the company of $8.52 billion at the time of the news. The rights will not be trading on a secondary market, so holders will only have a few days to exercise their rights. Now, finding the fair market value of Ivanhoe will take a little more work. The company is looking to raise about $1.8 billion by offering shares at $8.34. That creates up to 215 million shares. The company's new market value would be $10.32 billion with 956,348,000 outstanding shares equaling a fair market value of $10.79. And where is that stock today? $10.88.
On the day of April 18, I told my friend if he did NOT plan to exercise his rights but wants to continue owning Ivanhoe, he should sell them immediately and repurchase them after share dilution. Normally, the rights would be available to sell in an open market, allowing him to capture the "loss" on his share's reduction in value. There was no financial gain in holding them for the next few weeks since the stock did not pay dividends and he did not sell covered calls. He would also partake in the dilution of his shares. I didn't ask what his decision was; that's just rude, but the shares actually rose to $13.50 on other news on the same day, which would have given an investor a good price to sell out.
Be an Amazon Consumer, Not an Investor
Amazon [AMZN:NSD] shareholders may want to sell this week because the good times probably won't last. The world's largest online retailer surged about 15 per cent to over $230 after first-quarter earnings, but carrying that momentum for the remainder of the year will be a tough act with so many storm clouds hovering over the company. And with short sellers licking their fingers at this company, who's left to buy?
For some irrational reason, many analysts upgraded the company, even though the shares are trading at 185 times earnings. Any sane investor would glance at that P/E and know Amazon is extremely over valued. At these valuations, the company would have to be nearly perfect, no wait, better than perfect, to grow their shares. However, this is not the case. Declining profits, declining margins, declining guidance: these are not triggers to buy an expensive stock. No, these are cases to sell a company that appears to be the next Netflix [NFLX:NSD], Research in Motion [RIM:TSE, RIMM:NSD], or Netscape. If this company went private tonight, the new owners would have to wait 185 years to break-even, and that excludes the declining value of money.
Case in point: 2012 Q1 earnings indicated a profit margin of 0.99 per cent. That is, for every $100 I spend on Amazon.com, the company profits 99 cents. With so little room for error and a cut-throat industry that leaves losers in the dust, Amazon has to execute on a very high level. Take a look at the numbers. Revenue rose to $13.18 billion last quarter, a huge increase of 34 per cent but net profit was just $130 million, down 35 per cent by slashing prices to entice buyers. Its strategy of growing revenue may have worked, but it sacrificed its margins too much. Looking forward, the company's second quarter guidance was reduced to a net loss of $240 million. That's right folks. A company that sells more than $10 billion in products every three months will lose $240 million. If that doesn't scream sell, I don't know what else does.
It also doesn't help that the Kindle, their e-reader, is being sold at a loss. It was a strategy Microsoft [MSFT:NSD] and Sony [SNY:NYSE] employed with their video game consoles. The hopes for these two brands was that sales of video games, memberships, accessories, and down-loadable content would cover the losses on the consoles and it has worked. The major difference between Microsoft and Amazon - video games are $60, books are $6.
Add the expected sales tax collection which will eventually be law all across the United States, starting with California and Texas, and you have diminished price-advantage. For the last 18 years or so, with exception of five states, US Amazon customers never paid state sales taxes for purchases online, but this is about to change in 2013, as some customer's will now have to pay taxes like they do at brick-and-mortar shops. In Canada, it would be like never paying GST/HST/PST on Amazon.ca and then finding out that you have to start paying it next year. It will change consumer's behaviour and Amazon could see large-ticket items being left in stock for significantly longer.
What's ultimately problematic for me is the motive of upgrades by 9 analysts the day after earnings. Most traders ignore the noise from analysts. Their estimations and predictions are as educated as sophisticated investors, but their motives are often questionable. Paulo Santos of seekingalpha.com pointed out that Citigroup analyst Mark Mahaney upgraded his price target from $190 to $300 in a single day. But back in 2010, Mahaney predicted the company would earn over $5.32 a share by 2012. Amazon's real EPS: $1.27 (Full article here). How do so many companies change their perception of the company with one report, especially when the report showed that their margins are declining? There has been no significant change in the company's direction and profitability. Are they pumping the shares so they can dump them?
The company's total profit is less than it was at the end of 2008, but the shares are up 150 per cent in that time span. Revenue has risen significantly, but what's the point of selling more when you end up with less? It is energy well-wasted. It does not feel like Amazon's management wants to thrive as a business, but rather survive. Are they now fearful of Microsoft, Google [GOOG:NSD], and Apple [AAPL:NSD]? Amazon hasn't even considered paying a dividend. That's a sign that management knows their cash flow is not stable enough to pay out long-term holders. 70 per cent of its shares are owned by institutions, so one sell button by one firm could knock the shares back to normality.
Honestly, I believe Amazon will be the number one online retailer for decades and quite possibly for the entire 21st century, but being at the top only pushes competition to be better. And being number one doesn't mean your shares should be outrageously overpriced either. Realistically, for a company that is nearly two decades old and as established as this, the shares should be trading at a generous 15 times earnings, much like the rest of the market. That puts the shares at $20 not $230.
Disclaimer: I am short Amazon shares post-earnings.
Top 25 Dividend Yielding Stocks in Canada
Finding yield in a low-interest world can be a tough task. It's no longer the 1980's where saving your money at the bank was actually a wise thing. Today, savers will be lucky to earn 1.5% (the current yield on a one-year GIC). Take into consideration that last year's Canadian inflation rate was just under 3 per cent, savers will actually lose nearly 1.5 per cent on purchasing power. As a result, many investors have turned to the equities market over the last ten years. Since the low of 2002, the market has doubled in Canada, and dividends have grown by just as much.
If you've made contributions to your RRSP's this year, but haven't made a purchase yet, consider buying large reputable stocks with a long history of dividends. If your investment strategy consists of living off investment income and not capital gains or wealth, you could consider buying one of the 25 stocks below, whose dividend yields are north of 5 per cent and are valued at more than $1 billion in market capitalization.
All table information is based on the near closing prices on Thursday March 15, 2012. The information discounts previous and future dividend history, focusing only on current yields, prices, and company value and does not constitute a direction to purchase the stock. Please speak to an investment advisor before making any decision.
The benefit to buying equities is also its drawback. The value of a company over time can rise or fall, but if a person has consistent dividends and the outlook for the company is stable or profitable, then one only has to focus on the cash flow. Imagine the additional expenses one could subsidize by simply looking at high dividend-yielding stocks. On an investment of $10,000, you would earn $543 to $929 per year or $45.25 to $77.41 per month from the above stocks. If the investment is made in a regular investment account, that covers your phone or cable bill, maybe your child's bus pass, or a bank for a future small vacation.
If you've made contributions to your RRSP's this year, but haven't made a purchase yet, consider buying large reputable stocks with a long history of dividends. If your investment strategy consists of living off investment income and not capital gains or wealth, you could consider buying one of the 25 stocks below, whose dividend yields are north of 5 per cent and are valued at more than $1 billion in market capitalization.
| (Symbol) Company Name | Yield | Price | P/E | |
| (ERF) Enerplus | 9.29 | $23.24 | 38.1 | |
| (PGF) Pengrowth Energy | 8.52 | $9.86 | 39.4 | |
| (ATP) Atlantic Power | 8.30 | $13.86 | 0.0 | |
| (FRU) Freehold Royalties | 8.19 | $20.52 | 23.9 | |
| (NAE) NAL Energy | 7.75 | $7.74 | 51.6 | |
| (AGF.B) AGF Management | 7.09 | $15.24 | 12.8 | |
| (DH) Davis + Henderson | 7.09 | $18.29 | 11.7 | |
| (CLC) CML Healthcare | 7.05 | $10.66 | 533.5 | |
| (BNP) Bonavista Energy | 7.03 | $19.92 | 19.3 | |
| (BA) Bell Aliant | 6.87 | $27.64 | 19.5 | |
| (AX.UN) Artist Real Estate | 6.78 | $16.50 | 5.5 | |
| (SLF) Sun Life Financial | 6.26 | $23.00 | 0.0 | |
| (CRR.UN) Crombie Real Estate | 6.20 | $14.35 | 32.6 | |
| (NPI) Northland Power | 6.17 | $17.50 | 0.0 | |
| (CPG) Crescent Point Energy | 6.08 | $45.43 | 54.7 | |
| (TA) Transalta | 6.02 | $19.27 | 14.7 | |
| (CUF.UN) Cominar Real Estate | 5.99 | $24.03 | 8.8 | |
| (D.UN) Dundee Real Estate | 5.91 | $37.17 | 53.1 | |
| (CSH.UN) Chartwell Seniors Housing | 5.89 | $9.17 | 0.0 | |
| (BNE) Bonterra Energy | 5.84 | $53.38 | 20.9 | |
| (PBN) Petrobakken Energy | 5.78 | $27.85 | 12.1 | |
| (COS) Canadian Oil Sands | 5.57 | $21.54 | 9.1 | |
| (CWT.UN) Calloway Real Estate | 5.56 | $27.85 | 253.5 | |
| (PPL) Pembina Pipeline | 5.53 | $28.21 | 28.5 | |
| (PMZ.UN) Primaris Retail Real Estate | 5.43 | $22.45 | 22.8 |
All table information is based on the near closing prices on Thursday March 15, 2012. The information discounts previous and future dividend history, focusing only on current yields, prices, and company value and does not constitute a direction to purchase the stock. Please speak to an investment advisor before making any decision.
The benefit to buying equities is also its drawback. The value of a company over time can rise or fall, but if a person has consistent dividends and the outlook for the company is stable or profitable, then one only has to focus on the cash flow. Imagine the additional expenses one could subsidize by simply looking at high dividend-yielding stocks. On an investment of $10,000, you would earn $543 to $929 per year or $45.25 to $77.41 per month from the above stocks. If the investment is made in a regular investment account, that covers your phone or cable bill, maybe your child's bus pass, or a bank for a future small vacation.
Options Play on Yahoo!
Playing the Expiry: February 18, 2012
Shares of Yahoo! [YHOO:NSD] slipped more than seven per cent at one point today giving way to a massive rise in the $15 puts for February (monthly contracts). The options were asking merely $0.02 on Monday, but were trading as high as $0.36 earlier today. As of right now, if you wrote the puts, you could get a fill of $0.20 or more. That protects you in the evenet the shares fall an additional 1.32 per cent. Total margin required is only $450 per contract. This provides a return of 4.44 per cent against margin used. This trade is a bullish to neutral speculation suggesting the trader believes the shares will not trade below $15 on Friday.
A person could also write the 15 calls and earn an over $0.30 creating a minimum trading range by Friday of $14.50 to $15.50.
Shares of Yahoo! [YHOO:NSD] slipped more than seven per cent at one point today giving way to a massive rise in the $15 puts for February (monthly contracts). The options were asking merely $0.02 on Monday, but were trading as high as $0.36 earlier today. As of right now, if you wrote the puts, you could get a fill of $0.20 or more. That protects you in the evenet the shares fall an additional 1.32 per cent. Total margin required is only $450 per contract. This provides a return of 4.44 per cent against margin used. This trade is a bullish to neutral speculation suggesting the trader believes the shares will not trade below $15 on Friday.
A person could also write the 15 calls and earn an over $0.30 creating a minimum trading range by Friday of $14.50 to $15.50.
Post-Earnings Netflix Play
Playing the Expiry: January 27, 2012
If you had the guts to buy or sell Netflix [NFLX:NSD] options prior to their earnings last night, then I applaud you for your risk-taking, hopefully it went well. But now that their earnings have passed, option traders are still pricing in a heavy swing for one day!
The shares should remain at the current $117 level for quite some time, now that traders have found a nice "flat" range to settle on. The $120 level acted as previous support and is now current resistance. Earlier in the day, the weekly 120 call options were selling for as high as $2.34, but have come down to $0.65. The puts at 110 still have some value left as well, a surprising $0.30. If you've read PTE before, you know where I'm going.
Total premium on a short strangle at 120 and 110 would net you $0.95 right now. Each pair of legs will require just north of $3,000 margin (may vary with broker). You profit if the shares close on Friday between $120.95 and $109.05. That gives you a $11.90 range. Based on the current price of about $117, that provides downside protection of 7.29 per cent and upside protection of 3.37 per cent. Considering that the shares are now starting to downtrend on the day, the closer out-of-the-money calls may be worth the risk.
The total return on this trade is approximately 3 per cent for one day and two hours. Prepare yourself though, as the shares still possesses volatility, but as many traders will know, shares are often less volatile the day after earnings because all uncertain news has been removed.
If you want to go for broke, or think the shares will stabilize for one day at around $117, then you could also consider writing the 115 put for January 27. With a current bid of $1.22, you would return over $187 per pair, or over 5.6 per cent return. Personally, I would stay away from the 115 puts only because I think we will see some profit-taking tomorrow.
Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. Reminder that all Playing the Expiry posts are considered and executed transactions for my account and should not be taken as professional advice.
If you had the guts to buy or sell Netflix [NFLX:NSD] options prior to their earnings last night, then I applaud you for your risk-taking, hopefully it went well. But now that their earnings have passed, option traders are still pricing in a heavy swing for one day!
The shares should remain at the current $117 level for quite some time, now that traders have found a nice "flat" range to settle on. The $120 level acted as previous support and is now current resistance. Earlier in the day, the weekly 120 call options were selling for as high as $2.34, but have come down to $0.65. The puts at 110 still have some value left as well, a surprising $0.30. If you've read PTE before, you know where I'm going.
Total premium on a short strangle at 120 and 110 would net you $0.95 right now. Each pair of legs will require just north of $3,000 margin (may vary with broker). You profit if the shares close on Friday between $120.95 and $109.05. That gives you a $11.90 range. Based on the current price of about $117, that provides downside protection of 7.29 per cent and upside protection of 3.37 per cent. Considering that the shares are now starting to downtrend on the day, the closer out-of-the-money calls may be worth the risk.
The total return on this trade is approximately 3 per cent for one day and two hours. Prepare yourself though, as the shares still possesses volatility, but as many traders will know, shares are often less volatile the day after earnings because all uncertain news has been removed.
If you want to go for broke, or think the shares will stabilize for one day at around $117, then you could also consider writing the 115 put for January 27. With a current bid of $1.22, you would return over $187 per pair, or over 5.6 per cent return. Personally, I would stay away from the 115 puts only because I think we will see some profit-taking tomorrow.
Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. Reminder that all Playing the Expiry posts are considered and executed transactions for my account and should not be taken as professional advice.
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